Too many policymakers, investors and economists have concluded that US
authorities could have engineered a smooth exit from the bubble economy if only
Lehman had been bailed out. Too many now believe that any move towards greater
financial regulation should be sharply circumscribed since it was the government
that dropped the ball. Stifling financial innovation will only slow growth, with
little benefit in terms of stemming future crises...

Certainly the US and global economy were already severely stressed at the time
of Lehman’s fall, but better tactical operations by the Federal Reserve and
Treasury, especially in backstopping Lehman’s derivative book, might have
stemmed the panic. Indeed, with hindsight it is easy to say the authorities
should have acted months earlier to force banks to raise more equity capital.
The March 2008 collapse of the fifth largest investment bank, Bear Stearns,
should have been an indication that urgent action was needed. Fed and Treasury
officials argue that before Lehman, stronger measures were politically
impossible. There had to be blood on the street to convince Congress. ...

[C]ommon sense dictates the need for stricter controls on short-term borrowing
by systemically important institutions, as well as regularly monitored limits on
oversized risk positions, taking into account that markets can be highly
correlated in a downturn. ... There should also be
more international co-ordination of financial supervision, to prevent countries
using soft regulation to bid for business and to insulate regulators from
political pressures.

...The view that everything would be fine if Hank Paulson, then US Treasury
secretary, had simply underwritten a $50bn bail-out of Lehman is dangerously
misguided. The financial system still needs fundamental reform...

I think that even if Lehman had been bailed out the economy would still have
been bad, just not as bad, so either way there are substantial economic costs and a case
for regulation.

Too many policymakers, investors and economists have concluded that US
authorities could have engineered a smooth exit from the bubble economy if only
Lehman had been bailed out. Too many now believe that any move towards greater
financial regulation should be sharply circumscribed since it was the government
that dropped the ball. Stifling financial innovation will only slow growth, with
little benefit in terms of stemming future crises...

Certainly the US and global economy were already severely stressed at the time
of Lehman’s fall, but better tactical operations by the Federal Reserve and
Treasury, especially in backstopping Lehman’s derivative book, might have
stemmed the panic. Indeed, with hindsight it is easy to say the authorities
should have acted months earlier to force banks to raise more equity capital.
The March 2008 collapse of the fifth largest investment bank, Bear Stearns,
should have been an indication that urgent action was needed. Fed and Treasury
officials argue that before Lehman, stronger measures were politically
impossible. There had to be blood on the street to convince Congress. ...

[C]ommon sense dictates the need for stricter controls on short-term borrowing
by systemically important institutions, as well as regularly monitored limits on
oversized risk positions, taking into account that markets can be highly
correlated in a downturn. ... There should also be
more international co-ordination of financial supervision, to prevent countries
using soft regulation to bid for business and to insulate regulators from
political pressures.

...The view that everything would be fine if Hank Paulson, then US Treasury
secretary, had simply underwritten a $50bn bail-out of Lehman is dangerously
misguided. The financial system still needs fundamental reform...

I think that even if Lehman had been bailed out the economy would still have
been bad, just not as bad, so either way there are substantial economic costs and a case
for regulation.